Sunday, February 1, 2009

Economic structure and energy: Listening to fools

During the time of the Second Temple, the gift of prophecy was taken from the wise and given to fools. - Ancient Jewish saying

There are two solutions to the problem of understanding life. The first is to pick out a tribe to join, and then acknowledge the formulas and frame works the tribe supplies for understanding life. If you are socially involved with members of the tribe, and speak to them regularly about life, they will police your thoughts and appraise you as to the ways your thinking deviates from tribal norms. Thus solutions to life problems have less to do with a judicious determination of facts, than with sustaining tribal identity. Thus Rush Limbaugh hopes that President's Obama's stimulus program will fail because its success would increase the hold, which the Democratic Party has established on the Federal Government. Rush Limbaugh's tribal identity is maintained by defining the root of all problems as "Liberalism", and a prior every problem; every economic failure should be laid at the feet of liberalism. Of course, President Obama is following the path that President Bush laid down, which should be, by itself taken as a very bad sign, and Mr. Limbaugh assured us on many occasions that president Bush deserved the unquestioning support of Conservatives.

Mr. Limbaugh is, however right that Mr. Obama's thinking about the economic problems the country face is so fare bound by Liberal tribal norms. The problem, as it has been defined so far by the Obama administration is that Americans are not borrowing enough money. This is a common way of thinking, which has mistakenly been tagged with the name of Lord Keynes. Marxism would correctly diagnose the stimulus approach as politics. By Marxism, I refer not to the ideological movement founded by Karl, but to the humor of another Marx Brother, Groucho, who once quipped:

Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.

Unfortunately Groucho is right, and the quip accurately describes the current situation of the Obama administration, which has found economic trouble everywhere, misdiagnosed is causes, and most assuredly proposes to apply the wrong remedy. The quip would equally apply to Mr. Limbaugh and the band of utterly clueless congressional Republicans. Mr. Limbaugh ought not to blame Liberals and even center of the road Democratic politicians like Barack Obama for problems which ought more properly be laid at the foot of a very illiberal politician, Lee Kuan Yew. When the Communist rulers of china realized that the biggest threat to their continued rule was (Karl) Marxism, they identified the economic/political/social model Lee Kaun Yew had created in Singapore, as one that would give them what they wanted for China. Thus their trouble was caused by a desire to hold onto power in China, despite a pragmatic repudiation of the ideological basis of that rule. Lee Kaun Yew had succeeded in creating a stable, exceedingly prosperous state in Singapore, without the political incontinence of Democracy. Thus the Chinese Communist diagnosed the key to maintaining their rule in China was the emulation of the Singapore model, and for some time they appeared to succeed beyond their wildest expectations. Every success brings with it a new set of woes.

There was a defect in the Singapore model, however. The Singapore model called for capital accumulation by enforcing an extremely high savings rate. But had the Chinese Communist leaders been more given to asking questions, they might have wondered if transferring a political economic model from a tiny island with a population of under five million people, to a huge nation with a population of over 1.3 billion people might cause av few small problems. As the Chinese economy grew, two huge, and unanticipated defects in the application of the Singapore model to China, emerged. First the world economy began to strain in an effort to consume all of the Chinese made goods. The second problem was that savings were accumulating in China at a rate that was far higher than the ability of even the dynamically expanding Chinese economy to put them to work. There was a solution to these problems. The Chinese could raise the pay of their workers, and encourage them to buy all of the surplus Chinese made goods, we could call that the Wal-Mart solution. Instead the Chinese echoes to lend money to the United States, with the understanding that American consumers could have the money to pay for all of those Chinese made LCD TVs, and cell phones.

The resulting economic system was crazy, but American politicians and their economic advisors did not notice how crazy things really were. That is because American economic policy was controlled for 20 years by Alan Greenspan, a disciple of the crazy novelist and pseudo-philosopher who called herself Ayn Rand. Any country that allows its economic policy to be led by a follower of a major league nut case like Ayn Rand is going to end up in a world of hurt, and this is what happened to the United States during the last 20 years.

Alan Greenspan had a very limited repertory of economic ideas, which began and ended with the notion that if price inflation could be delivered, everything else would follow. Some where along the line Mr. Greenspan struck an agreement with the Chinese that created our present structural problem. It was cheaper to manufacture goods in China than in the United States, so production of American made goods was to be shifted to China. As heap Chinese made goods flooded the American market, prices would be staying low. The problem with this arrangement was that it required the dollar to look valuable enough to the Chinese. Mr. Greenspan happened on the truly amazing expediency of selling the Chinese dollars rather than trade goods, in fact the very same dollars the Federal Reserve was printing to pay for all of those trade goods that the Chinese were selling to Americans who did not really have the where with all to pay for them. The fly in the ointment was that the Greenspan system required that the United States be drained of wealth and of the ability to produce real wealth by moving the production of more and more American goods to China. The system itself was unsustainable, and at the end of the road, the United States of America would end up being bankrupt, and with no way to work itself out of the hole.

We now face an energy crisis that will require great deal of wisdom to solve. Only a fool would tell American leaders whist they want to hear about energy, and what they want to hear is a misdiagnosis that will offer seemingly easy, but impossible to apply solutions to the energy problem. The misdiagnosis and the wrong remedies are coming to us via one Amory Lovins, a college dropout, and long time fount of misinformation about energy and environmental issues. Amory Lovins can be described as the Alan Greenspan of energy. While for Greenspan, preventing inflation was the Alpha and Omega of economic policy, for Lovins, energy efficiency is. Greenspan was a follower of Ayn Rand and anti-inflation economist Author Burns, Lovins is a follower of major league nutcase, pseudo-environmentalist David Brower, and the small-minded economist E. F. Schumacher. Both Lovins and Greenspan specialize in telling politicians what they want to hear, while ignoring the big picture. The big picture is of a country that cannot afford the goods it buys, of an economic system, which hides the inflation it creates, and which certainly cannot afford the energy system Mr. Lovins advocates. I know, if you say, "Barton you have said all of this before," you would be 100% correct. And if you think I am going to say it all again, you are probably going to be right as well.

We are not going to stimulate our way out of structural problems, and building windmills and solar facilities is not going to stimulate the economy or solve our energy problems. Until we get beyond politics, and the need of politicians to take the easy solution advice of fools, nothing will. Not following the tribal solution may require us to think, but sometimes thinking can actually be a source of successful solutions that the tribal formula does not offer.

11 comments:

What you say may be largely true however, (and the States aren't alone in this way of thinking) this economic crisis cannot be solved by local initiatives or policy changes. What is needed is a total overhaul of the world's financial system, and I'm afraid that in trying to salvage this mess it is going to be made worse as governments respond to pressures from their constituencies for short term solutions. Historically this has often led to, inflationary and/or beggar-thy-neighbor policies that in the long run are counterproductive.

Great description: "The Greenspan of energy" LOL. On a more serious note, my heartfelt condolences on the loss of your father. He sounds like a great man, and readers of your blog can tell that he had a major influence on your life. That is the greatest legacy that a person can leave.

Excellent post, you really nailed the problem. I've been reading your blog for quite a while, but this entry made me sign up so I could give you an "attaboy." I loved the line about Amory Lovins being the Alan Greenspan of energy. LOL, so true, a pair of charlatans they are indeed.

I am not sure about the negative attribution to Ayn Rand. I personally believe she has described the California situation quite succinctly, and I am following the John Galt example. I am leaving the dysfunctional state called California for a better environment.

Charles Barton wrote:The misdiagnosis and the wrong remedies are coming to us via one Amory Lovins

If I give Amory Lovins the benefit of the doubt, the best I can say is that he proposes what may be the right solutions to the wrong problems. That is, he proposes solutions for problems of the old paradigm (fossil fuel energy economy). If all you have are fossil fuels, and they are expensive and limited, then you may need to go in the direction the Lovins indicates.

On the other hand, if we have energy that is clean, abundant and inexpensive, then from a system point of view we may be better off using a bit more energy and much less materials. For example, my house is "all electric". My heating system is a heat pump. But if energy were abundant and inexpensive, society as a whole might be better off if I were to use less efficient electrical resistance heat, and have the copper and steel from the heat pump used instead to provide additional energy.

But even if this is not the case, and I still should use a heat pump (from an overall system point of view), where Lovins goes wrong is with his choice of energy sources. We are still going to use energy no matter how well we conserve. Renewables are materials-intensive and thus expensive, and all too often unreliable. So it behooves us to use the best source of energy - nuclear.

domb Everyone in the south has AC anyway. It would not require any extra materials to convert central AC systems to air source heat pumps. Many Southern homes have gas furnaces attached to the AC duct work, so virtually no modification of the heating system other than replacement of the AC compressor with an air source heat pump would be required. Since AC compressors are replaced on 10 year cycles in the South, the conversion could be part of normal compressor replacement operation. Tax rebates and rebates from the electric company would cover the added cost to the homeowner.